By Tom Fairless and Todd Buell

FRANKFURT -- The European Central Bank is focused on avoiding a policy error committed four years ago by its big brother, the Federal Reserve.

When the Fed indicated -- on May 21, 2013 -- that it would gradually wind down its $85 billion-a-month bond-buying program, asset prices and currencies plunged around the world in an episode known as the taper tantrum.

Now, as the economy on this side of the Atlantic finally starts to recover, investors are watching closely for signs of a similar policy turn from the ECB.

The bank's top officials have acknowledged the improved economic outlook. But they have yet to make any change at all to their aggressive monetary stimulus, which includes EUR60 billion,or about $67 billion, a month of bond purchases and subzero interest rates.

That is partly the Fed's fault: ECB officials worry that even a small change in communications could ricochet through financial markets, undoing their extensive efforts to support growth and inflation.

"You all remember the 'taper tantrum' in the U.S., and I think the central banks prove to be good learners," Bostjan Jazbec, who sits on the ECB's 25-member rate-setting committee, told The Wall Street Journal on Wednesday.

The minutes of the ECB's latest policy meeting, published on Thursday, underlined similar concerns. Officials worried that a minor change in language could cause investors to quickly price in a completely new policy path, toward higher interest rates.

"Even small and incremental changes in communication could have strong signaling effects when interpreted as heralding a change in the monetary policy stance," the minutes said."What transpires very strongly from the minutes is the determination to be extremely cautious in modifying communication," said Peter Vanden Houte, an economist with ING in Brussels.

The ECB has a history of raising interest rates too early in the economic cycle. In both 2008 and 2011, the central bank raised rates just before the economy sank into recession.

But leaving its easy-money policies in place is risky, too. The eurozone economy outpaced the U.S. in the first quarter, and inflation has risen to 1.9%, within the ECB's target range. And yet the central bank is still signaling it might increase, rather than reduce, its stimulus.

If the ECB is seen to be responding too slowly to the changed outlook, the bank could lose credibility with investors. That would make it harder to control inflation.

The ECB's communication "has to remain in line with facts and an evolving reality," said Benoît Coeuré, who sits on the ECB's six-member executive board, in a Reuters interview published on the ECB's website on Thursday. "Too much gradualism in monetary policy bears the risk of larger market adjustments when the decision is eventually taken."

Some politicians in Northern Europe, meanwhile, are growing restive, concerned about the impact of years of ultralow interest rates on savers and pensioners. ECB President Mario Draghi was grilled by Dutch lawmakers last week in a bad-tempered exchange at the nation's parliament. Germany's finance minister, Wolfgang Schäuble, has repeatedly expressed frustration with the ECB's easy-money policies.

Mr. Jazbec suggested such calls to end the ECB's stimulus were premature given the depth of the recent economic crisis.

"You don't go skiing immediately after you took off the cast of your last skiing accident, so of course caution is, I think, something that is the word today," he said. "I do not really understandthose who immediately started to request, if not demand, changes to the course of our policy."

Still, the minutes of the ECB's April meeting hint at a possible exit route: The central bank could reassess its economic outlook at its June meeting, based on new data, and subsequently debate how to wind down its stimulus.

Until then, policy makers will have to navigate the narrow path between caution and credibility.

"None of us dares to declare the victory yet," Mr. Jazbec said.

Write to Tom Fairless at tom.fairless@wsj.com and Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

May 18, 2017 12:47 ET (16:47 GMT)

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